Taking Control of your Destiny: Effective Contract Negotiations and Vendor Management Iowa Bankers Association February 12, 2014 Jack Vonder Heide
Agenda • RFP Process • Due Diligence • Negotiations • Contracts • Vendor Management Environment • Quantitative vs. Qualitative Vendor Management
RFP Process • Split the process into an informal request for information followed by a more formal request for proposal. • Get as much information from as many potential vendors as possible during the first phase.
RFP Process • Don’t lock yourself into awarding the contract to the lowest bidder or to awarding a contract at all.
RFP Rules • Once you determine the rules for your RFP, stick to them.
Due Diligence • How long has the vendor been in business? • Who are the principals of the company and what are their backgrounds? • How is the company funded? • Are audited financial statements available? • Is the vendor or any of its principals a party to any lawsuits?
Due Diligence • How long has the sales person been with the company? • How many jobs has he/she had in the last seven years?
Due Dilligence • Does the vendor do business with other banks and other regulated entities? Do they understand the compliance environment?
Due Diligence • How many banks are currently using the product in a production environment?
Both Parties Should Benefit • Negotiating a contract that is a money-loser for the vendor is not in the bank’s best interest. Service levels and future enhancements could be jeopardized.
Negotiations • Learn everything you can about the people and the company on the other side.
Negotiations • Ask open-ended questions and listen. Let them talk. Do not interrupt.
Negotiating by Telephone • It’s easier to say “no” over the phone.
Negotiating by Telephone • You can’t see the other person’s eyes or body language. • You don’t have someone’s undivided attention.”
Negotiations • Try to get the other side to tell you “what’s most important to them” at the beginning of the negotiation. You give the appearance of caring about their needs while getting them to show their hand.
Negotiations • Information is power. Do not give away information that will hurt your position.
Authority • Never bring more negotiation authority to the table than the other side brings. • “We’ll have to get back to you” is a common tactic. • Always find out who will be at the table and what authority they have. Then you bring an equal or lesser level of authority.
Negotiations • Mix in critical points with things you are prepared to give away.
Negotiations • Never give without getting something back.
Negotiations • If you know one weakness of the vendor, they will assume that you know more.
Negotiations • Booking a deal in a particular quarter is often of paramount importance to a vendor. If you discover this need, you can often get major concessions in return.
Negotiations • No member of the negotiating team should publicly disagree with another member. • You team should have a single, unified voice.
Negotiations • Beware of back channel communications.
Avoid Pressured Decisions • Request a copy of the vendor’s contract at the beginning of the evaluation process.
Contracts • A good contract is one where both parties take the time to communicate about the deal, reach an agreement and then write a document that clearly memorializes their understanding.
Lawyers • There are comparatively few lawyers who understand the technology world well enough to write a great contract.
Contracts • Usually, the vendor proposes a contract that is heavily slanted in their favor. • The vendor’s liability is severely limited while the buyer’s liability is unlimited. • Many contracts contain provisions that do not meet the requirements of applicable law or regulatory guidelines.
Contracts • Many banks sign vendor contracts without legal review and without requesting any changes as they assume it is all “boilerplate” contract language. • If a vendor pressures you to sign a contract, tell them your board requires contract review.
Warranties • Be as specific as possible. • “We warrant that the system will be free from defects for one year” is too general. • “The system will process X workload within Y minutes on day Z during prime shift” is much better.
Governing Law • Many vendor contracts require that lawsuits be filed and tried in the vendor’s home state.
Master Agreement & Schedules • Many vendors use a “master agreement” of terms and conditions with a “schedule” for each new transaction. • A common tactic is to negotiate terms and conditions for the master agreement when the size of the first deal is very small.
Contracts • Poorly written contracts lead to lawsuits, soured relationships, unforeseen expenses and loss of productivity.
Contracts • When putting together a contract, assume that none of the parties sitting around the table will be here one year from now. • Clearly document all understandings.
Contracts • Give a draft of the contract to someone who knows nothing about the deal and ask them to explain it to you.
Litigation • Litigation is expensive. • If you win a lawsuit, you may not be able to collect your judgment.
Letters of Intent • A letter of intent can be a binding contract. These need legal review.
Common Tricks • Automatic contract extension unless cancelled in a specific timeframe • Interim rent • Right of substitution • Rent shifting • Lack of detail on specific costs like delivery, setup, consulting, maintenance, upgrades and termination assistance.
Common Tricks • You sign first, we sign later. • Termination penalties • Low cost for machine (i.e. printer or copier) and sky-high price for supplies • Contract term for a feature runs longer than the remaining term for the base product.
Follow-Up • Do not dissolve the team after the deal is done. • Have monthly meetings to gauge progress and compliance. • Immediately bring issues to vendor’s attention. • Give formal termination notice to preserve your rights.
Third Party Vendor Definition • “any person who provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.” Dodd-Frank
OCC Guidance – October, 2013 • http://www.occ.gov/news-issuances/bulletins/2013/bulletin-2013-29.html
Vendor Management • Greater reliance on third parties by banks • Regulations regarding data privacy and security • Increased focus on data safety due to publicized data breaches when information resides outside the bank